Government Expenditures and the Growth-Inequality Trade-Off: The Swedish Case

Hector Sala

Oriol Roca-Sagalés

Abstract

Sweden is one of the countries with the largest public fiscal intervention and narrowest income inequality in the world. This article investigates to what extent these two features are interconnected and whether economic growth affects and is affected by this relationship. Empirical results from vector auto-regression models reveal the existence of important long-run non-Keynesian effects (i.e., lessening fiscal expansions and, conversely, expansionary fiscal contractions) and significant downward effects of government expenditures on income inequality. The existence of a negative trade-off between growth and inequality is an important stylized fact which deserves close attention by policy makers.